Question

Question 6 Keep Your Memories manufactures pre-made scrapbook pages for scrapbookers who don’t have time to create their own pages. The clients need only insert their pictures on the pages. It currently sells a child’s scrapbook with pre-made pages for $57. Production costs are $24 variable and $12 fixed. The company is considering creating scrapbook kits instead to save labour costs. They are expecting to sell these kits for $45 each and save $15 in variable costs. Prepare an incremental analysis. (If an amount reduces the net income then enter with a negative sign preceding the number e.g. -45,000 or parenthesis, e.g. (45,000).)

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Answer 1

INCREMENTAL BENEFIT ANALYSIS

$ Revenue Less: Variable Cost Less: Fixed Cost Net Income Pre-made Pages 57.00 $ $ 24.00 $ Ś 12.00 $ 21.00 $ Incremental Kits revenue and costs 45.00 $ -12.00 9.00 $ -15.00 12.00 $ 24.00 $ 3.00

The company should begin to sell kits.

Points to be noted:

1. Nothing was mentioned regarding fixed costs. Hence fixed costs are assumed to be same in both the options.
2. The question does not specify any quantity or production capacity regarding both the products. Therefore, only one unit is considered for the incremental benefit analysis.